Trading activity in the currency markets was mostly thin on Friday amid the absence of major economic data and the New Year celebrations in China. Traders found no reason to bid up the dollar after rumors in late morning US trade that North Korean leader Kim Jong Il had been overthrown. The rumor, which was generated by market sources, was later unsubstantiated but had little impact on the dollar. The news did boost US stocks and continued to do so even after there were refuted. Market players discussed Thursday’s peculiar dollar’s drop following the improvement in the US trade figures, with some referring to dollar selling by Asian accounts. Although Asian central banks have been large buyers of US dollars to maintain currency competitiveness, the dollar selling might have been an attempt to avoid any excessive dollar rally following the data and diffuse any potential protest from Washington.

Markets turn attention to Tuesday’s Capital flow data from the US and the ZEW Survey from Germany, but most of all focus on Fed Chairman Greenspan Congressional testimony on Tuesday and Wednesday. UK CPI, US and Eurozone Industrial production, and US retail sales and Philly Fed Index will also be scrutinized as well as the US PPI.

Please tune in for our Sunday preview for more details on next week’s data/events.

USD/JPY little changed by Korea Rumors

USDJPY showed little reaction to the rumors regarding N. korean president Kim Jong Drifting. The pair still faces resistance around 105.70s, 38% retracement of the 112.51-101.66 drop, followed by 106.20 and 106.67 resistance—38% retracement of the drop from the 114.61 high thru the 101.66 low. Support starts at 105.60, followed by 105.30 and 104.90.

EURUSD held under 1.2890s

EURUSD consolidated mostly around the 1.2870-90s, continuing to face upside pressure at $1.2935—the 61.8% retracement of the $1.1758-1.2664 rally. $1.2950 comes up as the trend line resistance extending from the $1.3664 high thru the $1.3092 high. Subsequent resistance stands at 1.3020. Downside seen limited at $1.2816, followed by 1.2730 and key foundation at $1.2713, which is the 50% retracement of the said move.

Aussie hit 2 ½ month highs

The lack of data didn’t stop the Aussie from accumulating fresh gains past the 78 cent barrier amid escalating chances of a Q1 rate hike. Yesterday’s 45k rise in Australian defying a expectations of a 5K increase further strengthened chances that the RBA could will tighten rates from their current 5.50%. Earlier this week, the RBA opened the door for a rate hike in its policy statement when it said “…the likelihood of further monetary policy tightening being required in the months ahead had increased”.

Aussie’s faces rising resistance at 78.60, followed by 79. Support starts at 77.80 and 77.40.

At 2:50 PM US San Francisco Feds Yellen Speaks At 3:45 PM US Fed Board Governor Bernanke Speaks

Currencies traded with range overnight, with the dollar remaining weak following yesterday’s US trade data. Although December’s US trade deficit improved from November’s record figure, it was still short of consensus forecasts. As a result, the greenback reversed some of its recent bullishness, relinquishing its foothold on multi-month highs against the euro and the yen.

With no economic data slated for release today, currencies may continue to trade within range. Meanwhile, today’s events consist of speeches from Fed member’s Yellen and Bernanke.

Euro Rangebound

ECB Chief Economist Issing said the drivers of Eurozone growth is expected to shift to the domestic side in 2005. Issing acknowledged confidence had recovered, but still remains mired at low levels. He said the increase in the Eurozone business sector profits have been quite remarkable. Moreover, Issing does not see a consumption boom, with the recovery in line with disposable income. Any real rate rise must be driven by stronger growth, and lower or flat inflation expectations.

EURUSD remained confined to a narrow range throughout early Friday trading. Resistance starts at 1.29, followed by 1.2925 and 1.2960. Additional ceilings are seen at 1.30, followed by 1.3040 and 1.3075. Floors are eyed at 1.2830, backed by 1.28 and 1.2750. Subsequent support will emerge at 1.2735, backed by 1.27 and 1.2660.

Cable Retreats off 1.87

Cable backed away from the 1.87-level overnight, failing to sustain earlier gains. Interim resistance is seen at 1.8680, followed by 1.87 and 1.8730. Additional gains will target 1.8770, backed by 1.88 and 1.8850. Support starts at 1.86, followed by 1.8570 and 1.8520. Subsequent floors are seen at 1.85, followed by 1.8465 and 1.8430.

USDJPY

Resistance begins at 106, followed by 106.40 and 106.80. A move higher will encounter additional ceilings at 107, backed by 107.35 and 107.70. Meanwhile, support begins at 105.40, followed by 105 and 104.60. Subsequent floors are eyed at 104, followed by 103.80 and 103.50.

Aussie Buoyed

AUDUSD continued to benefit from yesterday’s upbeat labor report as well as the US deficit figure. The pair climbed to a multi-month high at 0.7838. Support starts at 0.78, followed by 0.7750 and 0.7735. Additional floors are eyed at 0.77 and 0.7650. Further gains will target 0.7840, followed by 0.7875 and 0.79. Subsequent ceilings will emerge at 0.7950 and 0.80.

The dollar fell across the board after the release of this morning’s US trade deficit showed a decline in the external imbalance. The dollar’s slide rested on the rationalization that the improvement was mainly the work of a temporary oil drop. The trade deficit fell 5% to a $56.4 billion in December from a revised $59.3 billion (previous $60.3 billion) in November as falling oil imports resulted from the 27% drop in oil prices between late October and end of December. The 12% drop in crude oil imports was the biggest since November 2002. Another potentially dollar negative event was the today’s admission from North Korea's indicating that it has nuclear weapons was mainly surprising because it’s the first time the government made such a public remark of a well known fact. But Pyong Yang’s admission renders the US pursuit of Iran’s nuclear possibilities in new perspective and could suggest more interventionism in US foreign policy, which is a high risk prospects for the dollar.


More details on the trade numbers and the dollar in Articles & Ideas-Forexnews.com

Currency markets had already been retreating away from the dollar since yesterday’s comments from Atlanta Fed President Jack Guynn indicating that the Fed might change the wording of its post-meeting statements, which were interpreted to mean a pause in the Fed’; tightening instead of an acceleration in the tightening. We stick to our position of earlier this year seeing the Fed to seize from tightening when the fed funds rate reaches the 3.25% level, especially that the swelling US trade deficit has taken the biggest bite out of GDP since Q2 1998.

There US Treasury had a disappointing 10-year auction of $14 billion, producing a higher than expected yield of 4.05% and a 2.05 bid/cover ratio from November’s 2.68 and the long-term average of 2.14. There was equally disappointing participation from indirect bidders--usually a proxy for central banks—as these picked a mere 28% of the total issue, a sharp drop from November’s 40.5%. With 10-year treasuries extending their rallies, foreign accounts could begin to view the bonds as overpriced, especially with the risk of renewed dollar depreciation.

On the bright side, weekly jobless claims fell by 13K to 303K, reaching their lowest level since October 2000. The 4-week average dropped to 315K from 331K.

Markets turn tomorrow to a series of key speeches. Office of Management & Budget Director John Bolten will speak at 10:30 am NYT, followed by Federal Reserve Governor Ben Bernanke speaking about inflation control at 3:45 pm NYT. Francisco Fed President Janet Yellen will speak about the US economic outlook at 4:50 pm NYT.

USD/JPY sheds losses post trade

The dollar’s gains accumulated in the first 5 hrs of the European session were lost in the 2 hours following the release of the US trade figures. A combination of a profit-taking and rationalization that an oil price rebound would cause a fresh bounce in the deficit helped weigh on the greenback.

Drifting around the 105.70s, 38% retracement of the 112.51-101.66 drop, USDJPY sees interim support at 105.60, followed by 105.30 and 104.90. Upside capped at 106.20, followed by 106.67 resistance—38% retracement of the drop from the 114.61 high thru the 101.66 low.

EURUSD gains over full cent as deficit still worries

The realization that today’s improvement in the US trade numbers suggest that US imbalance is far from showing concrete signs of a falling deficit. The December figure of $56 billion was the second biggest of all time, and the oil-related drop in oil imports was maybe short-lived

EURUSD faces interim resistance at $1.2935—the 38% retracement of the $1.1758-1.2664 rally. $1.2950 comes up as the trend line resistance extending from the $1.3664 high thru the $1.3092 high. Subsequent resistance stands at 1.3020. Support starts at $1.2816, followed by 1.2730 and key foundation at $1.2713, which is the 50% retracement of the said move.

<USDCAD drops below 1.24

The loonie rallied against the greenback, shrugging disappointing trade figures from Canada. The trade surplus fell to $C5.2 bln in December from a revised C$5.5 bln, disappointing expectations for a rise to $C6 bln. But the currency was unfased as traders largely scrutinized the US trade figures, which showed the second biggest deficit of all time.

USDCAD’s near 80-pip drop towards the 1.2400s, sees support at 1.2350—the 38% retracement of the decline from the 1.3387 high to the 1.1715 low. Subsequent support follows at 1.2320 and 1.2270. Upside capped at 1.2450—the trend line support extending from the key 1.1944 low thru the 1.2140 low. Subsequent resistance follows at 1.25.

Aussie hits year’s high past 78 cents

Aussie soared to a 5-week high amid a combination of strong employment figures and a post US deficit rally. The 5k rise in jobs increase chances that the RBA could will raise rates as early as this quarter. Earlier this week, the RBA opened the door for a rate hike in its policy statement when it said “…the likelihood of further monetary policy tightening being required in the months ahead had increased”.

Aussie’s faces the 78.43 high last hit in Dec 31, followed by capped at 78.60 and 79. Support starts at 77.80 and 77.40.

At 8:30 AM Canada December International Trade Balance (exp C$ 6.0bln, prev C$ 5.4bln) US December Trade Balance (exp -$52.0bln, prev -$60.0bln) US Initial Jobless Claims (exp 325k, prev 316k) At 2:00 PM Minneapolis Fed President Stern Speaks

Currencies traded sideways overnight as markets await the release of US trade balance data later in the session. The greenback may receive a slight boost if the deficit shrinks beneath the consensus forecast of $52.0 bln for December, following November’s record $60 bln deficit. Forexnews expect the trade deficit to have eased to $53 billion partly due to the stabilization in prices in November-December. The dollar could also be strengthened by another strong foreign participation in Thursday’s 10-year treasury auction if it produces a participation rate of above 40%.

Euro Trades Sideways

The ECB’s February monthly bulletin stated there was no evidence of a build-up in underlying Eurozone inflationary pressures. It said that conditions remain in place for economic growth to accelerate. The bulletin also said the Bank would maintain continued vigilance in the medium-term to inflation risks. The February bulletin, for the most part, echoed last week’s policy statement.

Separately, according to an ECB survey, the Eurozone’s inflation expectation for 2005 is 1.9%, unchanged from the previous survey. The inflation forecast for 2006 however, was downwardly revised to 1.8%, down slightly from 1.9%. It expects 2005 real GDP lower than previously forecasted at 1.8%, rather than the Q4 forecast of 2.0%.

EURUSD traded narrowly overnight, backing away from its session highs. Resistance is seen at 1.28, followed by 1.2830 and 1.2850. Additional ceilings are seen emerging at 1.29, followed by 1.2925 and 1.2960. Support starts at 1.2750, backed by 1.2735 and 1.27. Subsequent floors will emerge at 1.2660, followed by 1.2620 and 1.26.

BoE Unchanged

The Bank of England, as expected, held monetary policy unchanged at 4.75%. The BoE did not issue an accompanying statement, as customary when it stands pat. Cable holds steady above the 1.86-handle, with resistance seen at 1.8665, followed by 1.87 and 1.8730. Additional gains will target 1.8770, backed by 1.88 and 1.8850. Support starts at 1.86, followed by 1.8570 and 1.8520. Subsequent floors are seen at 1.85, followed by 1.8465 and 1.8430.

USDJPY Holds Steady Beneath 106

USDJPY continued to trade sideways overnight. Resistance begins at 106, followed by 106.40 and 106.80. A move higher will encounter additional ceilings at 107, backed by 107.35 and 107.70. Meanwhile, support begins at 105.40, followed by 105 and 104.60. Subsequent floors are eyed at 104, followed by 103.80 and 103.50.

Aussie Boosted on Jobs

Australia’s January employment rose by 44.5k, far exceeding forecasts for a 5k rise. The unemployment rate was unchanged at 5.1%, in line with expectations. The participation rate also beat forecasts up 64.1%, while full-time employment increased by 24k.

The Aussie rose sharply following the upbeat labor report, climbing just shy of the 0.78-level. The pair has since relinquished some of its gains, now holding steady near 0.7750. Support is seen at 0.7735, followed by 0.77 and 0.7650. Additional floors are seen at 0.7630, backed by 0.76 and 0.7570. Resistance starts at 0.7780, followed by 0.78 and 0.7840. Subsequent ceilings are seen at 0.7875, backed by 0.79 and 0.7950.

The dollar drifted away from its highs as traders pondered positions ahead of Thursday’s key US trade balance figures. The yen pushed of fits lows while sterling rallied on stronger than expected economic data. A drop in the US 10-year yield below the 4.00% for the first time in 4-months amid market reconsideration of further Fed tightening.

10-year yield drops below 4.00%

Prolonging the yield drop were comments from Atlanta Fed President Jack Guynn indicating that the Fed might change the wording of its post-meeting statements, which were interpreted to mean a pause in the Fed’; tightening RATHER THAN an acceleration in the tightening. We stick to our position of earlier this year seeing the Fed to seize from tightening when the fed funds rate reaches the 3.25% level, especially that the swelling US trade deficit has taken the biggest bite out of GDP since Q2 1998.
The Treasury’s 5-year auction of $15 billion, was sold at a high yield of 3.618% with a 2.53 bid/cover ratio from the 2.37 ration last month. Indirect bidders--usually a proxy for central banks--picked up a solid 45% of the raised amount, up from 39% in January’s auction.
Berry clarifies Greenspan, confirms our assessment

Fed Watcher John Berry, in an Bloomberg editorial, said that currency markets had misinterpreted Fed Chairman Alan Greenspan’s speech last Friday on the US current account deficit when said US exporters would be able to raise prices in case of further dollar declines. Greenspan said if that were to happen then US exports would rise and help stabilize the trade gap. If you recall, we specified on Friday that the dollar decline was overly exaggerated mainly on optimism of what Greenspan did NOT say, i.e. refraining from warning over a potential slowdown US-bound foreign investment and a hint on continued dollar declines as a requirement to a stabilization in the trade imbalance. But it seems Greenspan has found a new spin in the trade imbalance that does not focus on the US currency. Nonetheless, as Berry said, Greenspan’s remarks were far from indicating that the dollar decline has stabilized.

The dollar tomorrow could strengthen in the event that the US trade deficit has improved below the $55 billion mark in December from November’s record-breaking $60 billion. We expect the trade deficit to have eased to $53 billion partly due to the stabilization in prices in November-December. The dollar could also be strengthened by another strong foreign participation in Thursday’s 10-year treasury auction if it produces a participation rate of above 40%.

USD/JPY treads below 38% retracement

The edged higher on a combination of dollar consolidation from the Bank of Japan considering a gradual withdrawal of liquidity, partly as a technical move and a reflection of a strengthening economy. Traders will continue to scrutinize any preliminary signs from the central bank.

USDJPY topped just below the 105.78 resistance—the 38% retracement of the 112.51-101.66 drop, a breach of which sees interim cap at 106 level and 106.20. Subsequent pressure stands at 106.67 resistance—38% retracement of the drop from the 114.61 high thru the 101.66 low. Support starts at 105.30, backed by 104.70 and 104.30.

Sterling cheers data

The UK’s trade deficit rose as high as $1.8650 after an unexpected retreat in UK trade deficit to 4.43 bln sterling, besting forecasts for an increase to 4.8 bln sterling from November’s 4.71 bln sterling. Moreover, manufacturing jumped 0.6% m/m and 1.1% y/y, considerably better than forecasts for a 0.3% monthly increase and a 0.1% annual gain. Sterling was further pushed up when the Office of National Statistics said it would raise its Q4 GDP growth estimate by 0.1%.

Cable capped at $1.8583, followed by $1.8625-30. Key resistance stands at $1.8760. Support starts at $1.8513, which is the 50% retracement of the rise from the $1.7479 low (May 2004) to the $1.9549 high, followed by $1.8468. Key foundation follows at $1.84, which is a major foundation presented by the 200-day moving average as well as the trend line extending from the Sept 2003 low of $1.5616 through $1.7750 (Oct low).

EURUSD regains $1.28

Breaching the $1.28 figure, EURUSD faces interim resistance at $1.2816 --50% retracement of the 1.1986-1.3664 move, followed by 1.2860. Support starts at 1.2730 backed by key foundation at $1.2713, which is the 50% retracement of the rally originating from $1.1759 low of last April. Further losses seen facing the $1.2663 low, followed by 1.2630.

USDCAD nears medium-trend line support

As USDCAD drifts around 1.2470s, support comes up at 1.2450—the trend line support extending from the key 1.1944 low thru the 1.2140 low. A breach below 1.2430 could extend to 1.2370. Upside capped at 1.2581—38% retracement of the decline from the 1.4001 high from last May thru the 1.1715 low. Subsequent resistance stands at 1.2630.

At 10:00 AM US December Wholesale Inventories (exp 0.9%, prev 1.1%) US December Wholesale Sales exp n/f, prev 0.7%) At 11:00 AM US Fed Board Governor Gramlich Speaks At 7:15 PM NY Fed President Geither Speaks

The dollar’s latest rally stalled overnight on a combination of profit taking and traders digesting a report questioning Fed Chairman Greenspan’s optimism over the US current account deficit. The dollar relinquished some of its recent gains, retreating to 1.8642 against the sterling, and 1.2798 versus the euro.

Fed Watcher John Berry, in an editorial, said that currency markets had misinterpreted Fed Chairman Alan Greenspan’s speech last Friday on the US current account deficit. Berry said there were several reasons Greenspan had cited for why the deficit would not shrink. The main reason was the large discrepancy between imports and exports, in which exports would need to grow half as quickly as imports in order to prevent the deficit from widening. While the market sold the dollar on the report, traders will likely wait for the release of December’s trade data on Thursday prior to accelerating further moves.

Sterling Jumps on Data

UK’s trade deficit unexpectedly narrowed in December, declining to 4.43 bln sterling, and besting forecasts for an increase to 4.8 bln sterling from November’s 4.71 bln sterling. Moreover, manufacturing surged by 0.6% m/m and 1.1% y/y, considerably better than forecasts for a 0.3% monthly increase and a 0.1% annual gain. As a result, UK’s ONS said the latest data would raise Q4 GDP growth estimate by 0.1%, ceteris paribus.

The sterling rallied across the board following the better than expected data results. The knee-jerk reaction sent cable to 1.8642, with further resistance seen at 1.8665, followed by 1.87 and 1.8730. Additional gains will target 1.8770, backed by 1.88 and 1.8850. Support starts at 1.86, followed by 1.8570 and 1.8520. Subsequent floors are seen at 1.85, followed by 1.8465 and 1.8430.

Euro Edges Up

ECB Governing Council member Klaus Liebscher said he welcomed the re-ordering of FX following the G7 FinMin meeting, thus expressing approval for the euro’s recent decline. Liebscher however, warned that last week’s comments from Fed Chairman Greenspan were misinterpreted by the markets and suggested that he was not optimistic on the US current account deficit as many had originally perceived. Commenting on ECB policy, he said there was no immediate pressure to raise interest rates due to the weak Eurozone labor market. Liebscher added that inflationary pressure remains low and is expected to decline below 2% in 2005.

EURUSD recovered slightly in quiet overnight trading, edging back toward the 1.28-level. Resistance is seen at 1.28, followed by 1.2830 and 1.2850. Additional ceilings are seen emerging at 1.29, followed by 1.2925 and 1.2960. Support starts at 1.2750, backed by 1.2735 and 1.27. Subsequent floors will emerge at 1.2660, followed by 1.2620 and 1.26.

USDJPY Trades Sideways

Bank of Japan board member Suda said earlier in the session the Bank may soon need to adjust policy and permit a breach of its current account deposits target. Suda said that lowering the current accounts deposits target would be construed as policy tightening, but was a possibility if seen as a technical move and the economy was strong. However, he said that lowering the c/a deposits target now would be detrimental since the economy is stalling. Moreover, Suda said that changing conditions for ending quantitative easing would hurt BoJ credibility.

USDJPY held steady within a narrow range, stalling at the session high of 105.85. Resistance begins at 106, followed by 106.40 and 106.80. A move higher will encounter additional ceilings at 107, backed by 107.35 and 107.70. Meanwhile, support begins at 105.40, followed by 105 and 104.60. Subsequent floors are eyed at 104, followed by 103.80 and 103.50.

Aussie Inches Toward 0.77

The Aussie recovered slightly following its recent sell-off to multi-week lows versus the greenback. AUDUSD will face resistance at 0.77, followed by 0.7735 and 0.7780. Additional ceilings will emerge 0.78, backed by 0.7840 and 0.7875. Support begins at 0.7650, followed by 0.7630 and 0.76. Subsequent floors are eyed at 0.7570, backed by 0.7540 and 0.75.